Samsung Contemplates Breakup, Other Big Changes

Samsung Electronics (SSNLF) will provide investors with guidance Tuesday on whether it will break up its sprawling portfolio of smart phones, memory chips, consumer electronics, ship building, electronics components, consulting, energy technology, hotels and other products, and take other steps that could benefit shareholders.

The South Korean conglomerate has been under pressure from activist shareholder Elliott Associates to clean up its corporate structure and governance, to return more cash to investors and take other shareholder-friendly steps. The activist firm states that it plan would benefit all investors, while allowing the family of Vice Chairman Jae-Yong Lee to control the vast conglomerate.

Elliott's October campaign came as battery malfunctions caused Samsung to recall the Galaxy Note 7, an embarrassing episode that played into the hands of rival Apple (AAPL) . In a report on Samsung's options, Elliott argued that the issues surrounding the mobile device, "while unfortunate, do not diminish" the fund's view that Samsung is "a leading global technology company with a world-class brand."

The activist firm, which own less than 1% stake in Samsung, argues that Samsung's ordinary shares trade at a steep valuation discounts when compared to its peers.

Elliott wants Samsung to pay a one-time dividend of 30 trillion South Korean won ($25.6 billion) and to boost its ongoing payouts to shareholders.

The firm also argues that the operating company should list on Nasdaq to boost shareholder liquidity. Though Samsung has a market cap approaching $200 billion, Elliott noted, only about $300 million worth of stock trades on an average day.

"Micron (MU) , despite being less than 10% of Samsung Electronics' size in terms of market capitalization, provides more liquidity to investors in absolute terms," Elliott wrote.

After a breakup, Elliott argues, both surviving entities should add independent directors. Elliott also suggested merging other Samsung entities, among other steps.

Samsung said in its third-quarter earnings call in late October that it would relay its plan on the entire range of Elliott's proposals to investors in a November presentation.

Morningstar analyst Dan Baker described Elliott's suggestions as "sensible," in a note after the third-quarter report. "We would expect any move toward those outlined in the Elliott proposal would be taken very positively by investors," Baker wrote.

It is very possible that Elliott could launch a contest in Korea if Samsung doesn't implement some or all of their recommendations. Korean rules allow for a shareholder with a 0.5% stake for six months to nominate dissident director candidates at a company's upcoming annual meeting. It is possible that Elliott affiliates have held their stake, which was at 0.62% last month, for over six months, making them eligible to nominate a dissident slate at the company's annual meeting, which is expected in February.

The New York activist fund has launched more than 96 campaigns at 92 companies since 1994, according to FactSet. It has also undertaken 13 proxy fights and threatened director-election contests at four companies in efforts to drive M&A and other moves.

The campaign follows an unsuccessful effort by Elliott in 2015, where the fund sought to keep an $8.5 billion merger between related companies Cheil Industries Inc. and Samsung C&T from taking place. Shareholders approved the deal, which was considered a means of securing the Lee family's control of the Samsung industrial group, or chaebol, which has about 70 affiliates. Elliott subsequently sold its 7.1% stake in construction company Samsung C&T.